Industry Study Suggests that trading in u. S. Asset backed securities will become uneconomical if the rule is not tailored to fit the u. S. Market place. If it is uneconomical to act as a marketmaker for commercial mortgagebacked securities or residential mortgagebacked securities, auto loans, credit cards, collateralized loan obligations, then banks will pull out of the abs market which represents a 1. 6 billion source of Consumer Lending or 30 of all lending to u. S. Consumers. So my question to you, chair yellen, is how will the fed ensure that the final rule will be tailored to fit the u. S. Market which is the most liquid abs market in the entire world . So i will have a careful look at that. Im not familiar with all of the details of the b asal proposal, but anything we implement in the United States, there is nothing automatic that is implemented in the United States. And we will have a careful look at what the impact would be. Well, i appreciate you doing that. And i continue to urge the fed and you in particular as a member of fsoc to look at government regulation as a source of economic instability. To that end, we are told by many of the regulated Bank Holding Companies that there is no updated organizational chart within the fed. And so my question would be can you share with us or can your staff share with us a detailed organizational chart with the names and titles of the Bank Supervision regulation divisions full professional staff . I think so. The organizational as im told, whatever organizational chart you have is very dated. And so we cant even get many of the folks cant even yeah. I dont see any reason we cant. I appreciate you doing that. Switching gears really quickly to the Consumer FinancialProtection Bureau and funding source, which as you know according to the budget overview, the bureau makes public transfers from the Federal Reserve system or capped at 618 million for fy 15 and the transfer cap is estimated to be 631 million for fy 16. Given my time is scarce, if you could answer the following in yes or no responses that would be greatly appreciated. Does the fed approve the bureaus budget . Im not i mean we fund the bureaus. You fund it, but do you approve the budget . I dont think i think the answer is no, but can you veto specific allocations requested . No. I dont think so. And does the fed have protocols if the bureau seeks to transfer more than the cap on its transfers under the formula . Do you have a protocol in place to prevent that . I mean, we abide by the law. I need to look at the details of what our obligations and limits are. I need to look at that more fully but certainly have protocols to abide by what congress set out. Well, see, this is the problem that we have is that we dont have appropriations over we dont have appropriations control over the bureau. And so they get their funding from you, we would hope they would at least be accountable to you as the funding source. Is there any direct oversight of the implementation of the bureaus budget by the fed . No. Our Inspector General has authority both for the fed and the bureau. But the fed does not have authority over the budget and spending of the thank you. Thank you. And my last ten seconds, youve talked a little bit about the need for congress to address our longterm debt and deficit crisis. This seems to me a five alarm fire. Why isnt the fed, given that mandatory spending is 70 of the federal budget, why isnt the fed more aggressively Warning Congress that it must reform mandatory entitlement spending . Every fed chair that i can remember has come and told congress that this is a looming problem, with serious economic consequences. I know my predecessor has i have on many occasions, i certainly remember the chairman greenspan discussed with congress the importance of addressing this. Thank you. Time of tgentleman has expired. Thank you for your leadership in general, but also your participation and patience at this hearing. Also want to welcome our visitors and guests here today and thank you for bringing your important message. We do talk about how our Unemployment Rate has gone down substantially, which it has, below 5 now. But we all know when you get behind those numbers, there is really only two types of jobs being created right now in this country, high skilled, high paid jobs, we need very, very specific skills of advanced educations to get those things and low skill low paid jobs and were not creating middle skill, middle class jobs, the kind of jobs that have been the backbone of the country for a long time and allowed wages to grow and allow families to raise their families with one job. Infrastructure, there is nothing we can do as a country to help address that problem more than rebuilding our country. So if i could ever edit your tshirts, i would say let our wages grow, comma rebuild our country. But my question for the chair and again, thank you for your patience, in december when the decision was made to raise the federal fund rates, in your testimony you said that was in part based on a view that Economic Activity would continue to expand at a moderate pace and labor market indicators would continue to strengthen. And certainly based on the top line data from 2015 and 2014 where we saw decent gdp growth, improvement in the residential market, business investments, at a decent level, not where we would like them, but at a decent level, increases in r d investments. But you take into consideration the negatives from the oil and gas sector, the outlook for Economic Growth was reasonably solid and the labor market data that you were looking at the time must have been good because the january numbers were encouraging, not only in terms of unemployment, but wage data as you talked about. My question is, a lot has happened since that decision in the markets. And that tends to change behavior. When you look at the same kind of the same data you looked at when you made that decision in december, if you look at that data now, does it change your view as to your perspective on Economic Activity, Economic Growth, and general labor market trends. So i think the answer is maybe, but the jury is out. We have continued to see progress in the labor market over the last three months. There have been 230,000 jobs per month, averaging through. Gdp growth clearly slowed a lot in the Fourth Quarter. My expectation is that it will pick up this quarter. But on the other hand, financial conditions have tightened considerably and that can have implications for the outlook. And with the committee set in january, we had previously said that we regarded the risks to the outlook for Economic Activity and the labor market is balanced. What we said in january is that were evaluating and assessing the impact of these developments on the outlook for both labor market and activity for inflation and the balance of risks. And thats what were doing at this point. When you look, chair yellen, at recent data that you get better than anyone about credit formation and borrowing activities in the markets, are you concerned that there has been a significant contraction in Credit Availability based on recent market activities . And how much does that factor in to your that is an important factor. And have you seen it . Well, not really at this stage, but what we do see is that spreads, especially on lower graded bonds have widened considerably, borrowing rates have widened. What about bank lending . And it is not just energy. In our most recent survey of banks on their lending standards, we have seen a tightening that is reported in cni loans, in cre loans, and that certainly those loans continue to grow, but that is something that bears watching. And those it is really those kinds of trends that we need to evaluate. Very quickly, as you weigh your decisions, inflation and labor Market Participation are critical, overall view of Economic Activity is critical. This subcomponent, what is happening with Credit Availability, how important is that in your decisionmaking process . Well, what were trying to do is forecast spending in the economy. Investment spending and housing are two important forms of spending. And Credit Availability factors in to our forecast for both of those portions of the economy. Theyre not the only factors that matter, but they are a factor that is important and so we will be considering those and, you know, there is a number of weeks before we meet again in march. There is quite a bit of Additional Data well want to look at. But youve pinpointed exactly the kinds of considerations that will bear in our thinking. Thank you, again. Time of the gentleman has empired. The Ranking Member is recognized for unanimous consent request. Unanimous consent to insert into the record a statement from financial innovation now, that would like to highlight the very important work that fed reserve board is doing through the Faster Payments Task force which ben is a member. Without objection, i thank chair yellen, thank you for your testimony today. Without objection, all members have five legislative days with which to submit additional written questions for the witness to the chair, which will be forwarded to the witness for her response. I ask chair yellen you please respond promptly. Without objection, all members will have five legislative days to submit extraneous materials to the chair for inclusion in the record. This hearing stands adjourned. Welcome to power lunch. Im brian sullivan. Today in washington, d. C. , tyler, melissa and michelle are at cnbc hq and were here in part because of what you just saw, fed chair janet yellen wrapping up her testimony on the economy, not far from where were sitting right now. Hello, everybody. Your money is a little bit higher today, dow up 80 points, even as oil moves down and concern about the possibility of negative Interest Rates in america, tyler, moves up. All right, brian, thank you very much. Well be back with you shortly. That is where we pick it up with our steve liesman. Sum up chair yellens testimony and its effect on the market. I thought she was down the middle. She told them that, you know, the fed sees the risk from china, the risk from market volatility, to the hawks she said, you know what, she did not remove rate hikes from the table. Remember, this market is priced in no rate hikes this year. I could see the fed if the data were to turn, you know, even after yellens speech coming back and hiking rates if you were to get further improvement in the Unemployment Rate, a further sign the weakness we saw in the Fourth Quarter is not continuing into this year. There was one thing she was asked about this, i think the best way to put it, in her own words. Well, there is always some risk of a recession, and i recognize and just stated that Global Financial developments could produce a slowing in the economy. I think we want to be careful not to jump to a premature conclusion about what is in store for the u. S. Economy. So i dont think it is going to be necessary to cut rates, but that said, monetary policy, as i said, is not on a preset course. Just one more thing she talked about, negative Interest Rates. And she said the fed wouldnt rule them out. But and also a question to the legality of it, said the fed hadnt fully studied it but did not strike me as any nearer to being a reality in the United States now. Lets bring in ellen zentner. You agree with steves assessment . What if anything stood out to you from chairman yellen today in. She threaded the needle. They dont speak the same language. The fed is never going to be willing to say anything further than were unlikely to hike rates at the next meeting. And they havent pushed back against Market Expectations that are assuming theyre not going to go in march. But markets that want them to Say Something more definitive like rate hikes are off the table for this year, or say anything about the path of policy after march, markets are just not going to get that, not from a data dependent fed that does no forward guidance. Maybe it is my impression of it, but i got the impression compare ed to the last time, sh was more cognizant because she was cognizant then but admitted more up front that the dollar appreciation is a head wind and global hot spots, turmoil, is more of a head wind here. Absolutely. The tilt was dovish in the same vein as the january fomc statement and bill dudleys comments on february 3rd. She was more explicit about what part of financial conditions is it that youre tracking. Were trying to send that message to markets, i hear you, we see this, it does pose a risk, but it is too premature to say it is a downside risk. What i worry about is the gap remains wide. I worry that the gap will be filled at least from the market standpoint, if the market ends up being wrong in a violent way and you can imagine the march employment report coming in with a 4. 8 Unemployment Rate, another tickdown. And high wage growth. And the market is going to be i know it is only a fiveyard penalty offsides in the nfl, but this will be a 15yard personal foul if the market is offsides on the fed here. I think they have gone way too far. In pricing out the possibility. I think the fed is never going to see eye to eye with the markets. The market is pricing in recession. Thats why theyre expecting a rate hike. Here is how yellen and crew can bridge that gap. At the march meeting, we know just based through data, on data through today, financial conditions through today, theyre going to have to revise lower the forecast for growth and inflation. I bet those dots come down from 4 to 2 rate hikes for this year. Thats not that far from market perception. Lets take a pause here. We have a news alert in the bond market. Ten year notes up for auction. Rick santelli. Demand is the great it was a bit above average. I gave the grade a b minus, b as in boy minus, yield in auction of 23 billion 10year notes. Looks like 1. 73, 1. 75, 1. 74 is traded priced right with one issued market. If i look at bid to cover, white fly in the ointment, 2. 56, versus 2. 65 ten auction average. Lowest since august of 2015. Everything else, 62. 3 on indirect. A little better than ten auction average. 15. 3 on direct, best since may of 2015. Primary dealers get 22. 4 in the auction. So b minus, makes sense. When there is all these issues regarding the fed, tomorrow is the longest end. We finish off with 15, 1. 5 billion of 30 year bonds. Melissa lee, back to you. Rick santelli, thank you so much. Lets continue discussion. Would the markets i want to point out with the u. S. Government can sell bonds, 2. 5 times bid to cover at 173, that is an a in my book. Youre selling 173 on the yield and you can sell at 2 1 2 times bid to cover, thats an a in my book. What were you going to ask . Im sorry. Before i interrupted myself. Are the markets offside with the fed . If they go down to two hikes, for the year, would that mean the markets lost that . Not that much. Shes right. If the fed comes down, i think thats a good possibility that the fed does come back, at least to 3, maybe to 2. The risk to 3, that wont tell the markets anything. Youre at the march meeting. March is taking off the table. Just bringing the dots down to three wont do it. Youre having to herd cats here. You have 17 policymakers turning in their individual forecasts for where they think the path of policy will be. You cant say somebody has to take one for the team and lower the dot. It has to happen organically. There is the risk that the median comes down to 3, maybe the mean at 2 and we split hairs. I dont trust the stock market because i think prices are down for a lot of reasons that may or may not have anything to do with recession. But is the bond market telling you that the u. S. Economy is going into recession . Well, the bond market, thats the bear market, right . And so what the bond market, what bond Market Pricing tells you is that it is an average way across a whole host of scenarios, which is going to include very terrible scenarios, recession, they back out the one rate hike they did, they possibly go negative. Thats always going to keep much fewer rate hikes priced into the path than what the fed is going to show. And thats when i say theyre never going to see eye to eye, the fed and markets, but they can meet closer to the middle so when i agree, but i will say this, numerous times over the past five years when the economy has been in recovery, we have had yields either at this level or even below this level. We hit 1. 75 on the way up and everybody is like, thats good news. Why is 1. 75 now bad news . It is not necessarily bad news. It is just that i feel like Market Sentiment has gotten disconnected from the fundamentals of the economy. What im worried about i want to interrupt real quick. The bad news is in the high yield spreads. What happened to the cost of funding for corporations, it is where Interest Rates hit the real economy and thats where there is some problems that are out there. What you have in this 173, in my opinion, is a flight to safety. You have that in the gold price and everywhere. Things were getting better. What was it then . Usually when the market feels better about the economy, the yield tends to rise. And when it feels really scared it goes scurrying for the cover of the u. S. Government and it buys u. S. Treasuries. That is the general pattern. You also had the 2011 crisis. There were reasons why the yields went where they went. Again, for reasons that either had to do with the u. S. Economy or exogenous factors is what drove those lower. Im being my normal nagyse sf and i hear what hes saying